Ias 33 - Eps

IAS 33 - Earnings per share
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Share-based payments and earnings per share Page 2
Typical coverage of US GAAP
Earnings per share (EPS):
Basic
Diluted
Presentation and disclosure
Executive summary
EPS:
The accounting and disclosure requirements for IFRS and US GAAP are substantially the same.
Both require presentation of basic and diluted EPS on the face of the income statement. Both IFRS
and US GAAP specify that diluted EPS shall include incremental shares in the calculations,
including the effects of stock options and warrants using the treasury-stock method and the effects
of contingently issuable shares using the if-converted method.
For diluted EPS, incremental shares, using IFRS, are computed as if the entire year-to-date period was
the period. There is no averaging of the current period (quarter) with each of the prior periods (quarters).
Primary pronouncements
US GAAP
ASC 260, Earnings Per Share
IFRS
IAS 33, Earnings Per Share

Progress on convergence
EPS:
The FASB and the IASB are jointly working on a
short-term convergence project to resolve the
differences in the standards, with both Boards
issuing exposure drafts in August 2008. In April
2009, the Boards decided to delay the EPS
convergence project pending completion of other
projects.
EPS
Basic
Requires the disclosure of basic EPS in the
statement of income.
Similar, although there are a
few detailed application
differences in the arithmetical
model used to calculate the
weighted-average shares
outstanding.
IFRS US GAAP
EPS
Diluted
Requires the disclosure of diluted EPS in the
statement of income.

Diluted EPS includes incremental shares in the
calculations, including the effects of stock
options and warrants using the treasury-stock
method and the effects of contingently issuable
shares using the if-converted method.
Similar, although there are a few
detailed application differences in
the arithmetical model used to
calculate the weighted-average
shares outstanding.
IFRS US GAAP
EPS
Diluted
IFRS
Always assumes that contracts that may be
settled in cash or shares will be settled in
shares. Thus, these types of contracts will
always impact the computation of diluted EPS.
US GAAP
Presumes that contracts that may be settled in
cash or shares will be settled in shares unless
evidence is provided to the contrary.
Such evidence might include a past history of
cash settlements of similar instruments or an
explicit requirement that the settlement is made
in cash.
These contracts typically impact the computation
of diluted EPS, but could be excluded from the
computation of diluted EPS if evidence is
provided that the settlement will be made in cash.
Example 5
An entity issues 1,000 convertible bonds on January 1, 2010. The
bonds have a five-year term, are issued at a $1,000 face value at 5%
interest per year and are convertible into 100 shares of stock for each
$1,000 bond at any time through December 31, 2014. The entity has
the option to settle the principal amount of the bonds for either 100
shares for each bond or the equivalent cash amount. The entity has
no evidence that the contracts will be settled in cash. During 2010,
the entity earned $20.0 million and had 1.0 million common shares
outstanding. There is no tax rate and no tax effect is considered in
the adjustment to net income for the interest on the bonds.
Contracts that may be settled in cash or shares example
Calculate the basic and diluted EPS in 2010 under US
GAAP and IFRS.
Assume that management has evidence that the
convertible debt will be settled for cash due to its past
history of cash settlements and intent to settle in cash.
How would this assumption affect the calculation of diluted
EPS under US GAAP and IFRS?
Example 5 solution:

Basic EPS

The calculation for basic EPS is the same for US GAAP and IFRS.

Net income $20,000,000
Common shares outstanding 1,000,000
= $20
Example 5 solution (continued):
Diluted EPS

Under US GAAP, the convertible debt is presumed to be settled in shares since there is no evidence to the
contrary. IFRS always assumes that the convertible debt would be settled in shares; therefore, the
calculation is the same.

Add interest on bonds
(1,000 convertible bonds x $1,000 = $1,000,000 x 5% interest = $50,000) 50,000
Adjusted net income $20,050,000
Add assumed conversion of bonds ($1,000,000/1,000 x 100 = 100,000 shares) 100,000
Adjusted shares outstanding 1,100,000
Adjusted net income $20,050,000
Adjusted shares outstanding 1,100,000 = $18.23
Cash settlement

With the evidence that management has provided regarding its cash settlement history and
intentions to settle in cash, for US GAAP, there would be no consideration of the dilutive effect of
the bonds on the diluted EPS calculation, resulting in a diluted EPS of $20 as calculated above
under basic EPS. Under IFRS, this evidence would not be considered and share settlement
would be presumed, resulting in the diluted EPS of $18.23 as calculated above.
EPS
Diluted calculation of weighted shares outstanding
IFRS
The number of incremental shares is
computed as if the entire year-to-date
period was the period (that is, there is no
averaging of the current period with each
of the other periods).

US GAAP
The number of incremental shares
(attributable to options, warrants and
contingently issuable shares) is computed
using a year-to-date weighted average of
the number of incremental shares included
in each quarterly calculation.
Example 6
Investors Incorporated (Investors) earned $5.0 million per quarter during 2010, for total net income for the
year of $20.0 million. The common shares outstanding remained at 2.0 million shares throughout the year.
Investors had 400,000 stock options outstanding during the entire year at an exercise price of $25 per
option. No options were exercised during the year.
There were no incremental shares calculated during the first and second quarters as the market price of the
common stock was below the grant or exercise price. However,
Calculation of weighted shares outstanding example
Calculate the basic and diluted EPS for Investors for each
quarter, and annually, in 2010 under US GAAP and IFRS.
during the third and fourth quarters, the market price of the stock
rose above the grant-date price, thus incremental shares were
calculated for these two quarters. The third-quarter average market
price was $50 per share and the fourth-quarter average market price
was $52.63 per share. The average market price for the year was
$34.48 per share.

Example 6 solution:

US GAAP: As shown in the calculation below, Investors determined the quarterly incremental
shares using the average for the quarter; however, the annual incremental shares are determined
using the average of the quarterly incremental shares.

* Calculated as net income divided by common shares. ** Calculated as net income divided by dilutive shares.
Q1 Q2 Q3 Q4 Year to date
Net income $5,000,000 $5,000,000 $5,000,000 1 $5,000,000 1 $20,000,000 1
Common shares 2,000,000 2,000,000 2,000,000 1 2,000,000 1 2,000,000 1
Incremental shares
(1)
- - 200,000
(2)
210,000
(3)
102,500
(4)
Dilutive shares 2,000,000 2,000,000 2,200,000 1 2,210,000 1 2,102,500 1
Basic EPS * $2.50 $2.50 $2.50 $2.50 $10.00 1
Diluted EPS ** $2.50 $2.50 $2.27 $2.26 $9.51
(5)
(1)
Incremental shares attributable to the price of common stock exceeding the exercise price of
common stock options, based on the average price of common stock for the quarter.
(2)
Third-quarter calculation of incremental shares:

Stock options 400,000
Exercise price $25.00
Proceeds to company

$10,000,000
Average market price of stock for third quarter $50.00
Shares assumed repurchased 200,000
Incremental shares (400,000 - 200,000 = 200,000) 200,000
(3)
Fourth-quarter calculation of incremental shares:

(4)
Summation of incremental shares for the quarters divided by four.
(5)
Does not equal the sum of the quarters due to the effect of average incremental shares for the
year.

Proceeds to company

$10,000,000
Average market price of stock for fourth quarter $52.63
IFRS: As shown in the calculation below, Investors determined the quarterly incremental shares in
the same manner as US GAAP using the average for each quarter; however, the annual
incremental shares are determined using the average for the year. This results in a diluted EPS
that is slightly lower ($.03) than US GAAP.

* Calculated as net income divided by common shares. ** Calculated as net income divided by dilutive shares.
Q1 Q2 Q3 Q4 Year to date
Net income $5,000,000 $5,000,000 $5,000,000 1 $5,000,000 1 $20,000,000 1
Common shares 2,000,000 2,000,000 2,000,000 1 2,000,000 1 2,000,000 1
Incremental shares
1)
- - 200,000
(2)
210,000
(2)
110,000
(3)
Dilutive shares 2,000,000 2,000,000 2,200,000 1 2,210,000 1 2,110,000 1
Basic EPS * $2.50 $2.50 $2.50 $2.50 1 $10.00 1
Dilutes EPS ** $2.50 $2.50 $2.27 $2.26 1 $9.48
(4)
(1)
Incremental shares attributable to the price of common stock exceeding the exercise price of
common stock options, based on the average price of common stock for that period.
(2)
This calculation is the same as US GAAP as the period is one quarter.
(3)
Calculation of annual incremental shares using the period of one year:

(4)
Does not equal the sum of the quarters due to the effect of the average incremental shares for
the year.
Proceeds to company

$10,000,000
Average market price of stock for the year $34.48
EPS
Diluted contingently issuable shares
IFRS
Potentially issuable shares are considered
contingently issuable and are included in
diluted EPS using the if-converted method
only if the contingencies are satisfied at
the end of the reporting period.
US GAAP
Potentially issuable shares are included in
diluted EPS using the if-converted method
if one or more contingencies exist that
relate to the entitys share price.
Example 7
The EPS Company (EPS) has issued 5% convertible bonds for
$1.0 million, which may be converted into 10,000 shares of
common stock if the per-share price of the common stock reaches
$40 per share. During the year, EPS earned $20.0 million after
taxes and had 2.0 million shares of common stock outstanding, of
which the average market price for the common stock was $30 per
share. At no time during the year did the market price of the
common stock exceed $35. EPS tax rate is 40%.
Contingently issuable shares example
Calculate the diluted earnings per share for EPS for the year
under US GAAP and IFRS.
Example 7 solution:

US GAAP:

The diluted EPS calculation would include the incremental shares attributable to the bond even if
the common price was not met.
Add interest on bonds less taxes
($1,000,000 x 5% interest x 60% = $30,000) 30,000
Adjusted net income
$20,030,000
Add assumed conversion of bonds 10,000
Adjusted shares outstanding 2,010,000
Adjusted
net income $20,030,000
Adjusted
shares
outstanding
2,010,000
= $9.97
IFRS:

The diluted EPS calculation would not consider the contingently issuable shares as the contingency
that gives rise to the conversion feature has not been met. Therefore, the diluted EPS is the same
as the basic EPS or $10 calculated as $20.0 million of net income divided by the 2.0 million shares
outstanding.
EPS
EPS and basic and diluted EPS computations must
be presented on the face of the statement of income
each year.
The following must be disclosed:

How the basic and diluted calculations were
determined, including the:

Weighted-average shares outstanding
Incremental shares
Amount of net income or loss (as adjusted)
Basic and diluted EPS for discontinued
operations
Similar
Similar
IFRS US GAAP
EPS
IFRS
Extraordinary items are not permitted.

Allows adjusted basic and diluted EPS
based on alternative earnings measures to
be disclosed in the financial statements.
US GAAP
Basic and diluted EPS must be disclosed
for extraordinary items.
Does not allow EPS based on alternative
earnings measures to be disclosed in the
financial statements.
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SCORE No. MM4058C.

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IAS 33 - Earnings per share

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